Unit 1: Basic Economic Problem: Choice and the Allocation of Resources
Recommended Prior Knowledge
This can be studied without any prior knowledge but students will, hopefully, have some idea of what economics is about and the skills they will use and develop over the course.
Context
This first Unit introduces some important economic concepts that underpin the course. The economic problem results in choices having to be made by households, firms and the government. Factors of production are used in the production of goods and services and receive income to spend on goods and services.
Opportunity cost is a key economic concept which will be used throughout the course.
Outline
The Unit starts by exploring the nature of the economic problem in terms of limited resources and unlimited wants. It then considers resources by defining the four factors of production. Finally, it examines the meaning of opportunity and how this concept can be used to analyse and evaluate economic choices.
This can be studied without any prior knowledge but students will, hopefully, have some idea of what economics is about and the skills they will use and develop over the course.
Context
This first Unit introduces some important economic concepts that underpin the course. The economic problem results in choices having to be made by households, firms and the government. Factors of production are used in the production of goods and services and receive income to spend on goods and services.
Opportunity cost is a key economic concept which will be used throughout the course.
Outline
The Unit starts by exploring the nature of the economic problem in terms of limited resources and unlimited wants. It then considers resources by defining the four factors of production. Finally, it examines the meaning of opportunity and how this concept can be used to analyse and evaluate economic choices.
Define the nature of the economic problem in terms of finite (limited) resources and infinite (unlimited) wants.
Define opportunity cost and analyse particular circumstances to illustrate the concept.
Define the factors of production (land, labour, capital, enterprise).
Factors of production
Factory buildings as capital goods
Factors of production are various types of resources used in the production of goods and services. They are:
Capital and labor are active factors while land is passive. One can only shift capital and labor rather than land which is given limited, to get a production-factor combination, which is further reflected in the technology a firm employs to produce products and services.
Labor operates capital to produce. The ratio of labor over capital is a major decision almost all firms must make. In the decision process, decision makers must understand that neither too much labor per unit of capital nor too much capital per unit of labor is acceptable since either way efficiency is not achieved. The 2 factors must come around someplace that both of them contribute equally to the final economic value realized.
Factory buildings as capital goods
Factors of production are various types of resources used in the production of goods and services. They are:
- Land (natural resource) - natural resources used in the creation of products, paid in economic rent, because they are simply irreproduceable.
- Labor - human efforts provided in the creation of products, paid in wage.
- Capital goods - human-made goods or means of production (including machinery, building and so forth) used in the production of other goods, paid in interest.
Capital and labor are active factors while land is passive. One can only shift capital and labor rather than land which is given limited, to get a production-factor combination, which is further reflected in the technology a firm employs to produce products and services.
Labor operates capital to produce. The ratio of labor over capital is a major decision almost all firms must make. In the decision process, decision makers must understand that neither too much labor per unit of capital nor too much capital per unit of labor is acceptable since either way efficiency is not achieved. The 2 factors must come around someplace that both of them contribute equally to the final economic value realized.
Factors of production
To produce goods and services requires resources. We call these the factor inputs available in the production process.
Economic resources are scarce relative to the infinite needs and wants of people and businesses operating in the economy. It is important to use these resources efficiently in order to maximise the output that can be produced from them.
Economists make a distinction between three types of resources - land, labour and capital.
LAND
Land is the natural resources available for production. Some nations are endowed with natural resources and exploit this by specialising in the extraction and production of these resources - for example - the development of the North Sea Oil and Gas.
Only one major resource is for the most part free - the air we breathe. The rest are scarce, because there are not enough natural resources in the world to satisfy the demands of consumers and producers. Air is classified as a free good since consumption by one person does not reduce the air available for others - a free good does not have an opportunity cost
LABOUR
Labour is the human input into the production process.
In the UK, of about 59 million inhabitants only approximately 35 million are of working age (16-64 years for men and 16-59 for women), and of those about 28 million have paid jobs. The employment level for people in the Uk economy is shown in the chart below. Over recent years there has been a sustained increase (expansion) in the employed labour force - providing more labour resources with which to increase total output (GDP)
Two important points need to be remembered about labour as a resource:
A housewife, a keen gardener and a DIY enthusiast all produce goods and services, but they do not get paid for them. They are producing non-marketed output and the output of these people is not included in Gross Domestic Product
Not all labour is of the same quality. Some workers are more productive than others because of the education, training and experience they have received
Human capital refers to the quality of labor resources, which can be improved through investments in education, training, and health
ENTREPRENEURS
Entrepreneurs are people who organize other productive resources to make goods and services. Some economists regard entrepreneurs as a specialist form of labour input. Others believe that they deserve recognition as a separate factor of production in their own right.
The success and/or failure of a business often depends critically on the quality of entrepreneurship.
CAPITAL
To an economist, capital has several meanings - including the finance raised to operate a business. But normally the term capital means investment in goods that can produce other goods in the future.
Capital refers to the machines, roads, factories, schools and office blocks which human beings have produced in order to produce other goods and services. A modern industrialized economy possesses a large amount of capital, and it is continually increasing. Increases to the capital stock of a nation are called investment. Investment is important if the economy is to achieve economic growth in the long run.
FIXED CAPITAL:
Fixed capital includes machinery, plant and equipment, new technology, factories and buildings - all goods designed to increase the productive potential of the economy in future years.
We also include the social capital created from Government investment spending, i.e. the building of new schools, universities, hospitals and spending on expanding the national road network. In the summer of 2000, Chancellor Gordon Brown announced large scale increases in government spending on education, health and transport. One reason behind this spending boost was the desire to increase the stock of social capital available to meet the needs of the economy in a changing world.
See also public goods and merit goods
WORKING CAPITAL:
Working capital includes stocks of finished and semi-finished goods (components) that will be either consumed in the near or will be made into finished consumer goods.
Example: What resources go into making a car?
Focus on the main factor inputs:
Labour: Workers employed directly in the car industry; engineers, designers, paint sprayers, testers, management staff, transport & distribution workers etc
Land: Natural resources used in manufacturer, land for plant and equipment
Capital: Fixed capital: machinery, technology, buildings + Working capital: i.e. stocks of raw materials and components
Entrepreneurship (sometimes seen as a separate factor): management, risk-taker
"If God had meant there to be more than 2 factors of production, He would have made it easier for us to draw three-dimensional diagrams"
To produce goods and services requires resources. We call these the factor inputs available in the production process.
Economic resources are scarce relative to the infinite needs and wants of people and businesses operating in the economy. It is important to use these resources efficiently in order to maximise the output that can be produced from them.
Economists make a distinction between three types of resources - land, labour and capital.
- LAND
- LABOUR
- CAPITAL
LAND
Land is the natural resources available for production. Some nations are endowed with natural resources and exploit this by specialising in the extraction and production of these resources - for example - the development of the North Sea Oil and Gas.
Only one major resource is for the most part free - the air we breathe. The rest are scarce, because there are not enough natural resources in the world to satisfy the demands of consumers and producers. Air is classified as a free good since consumption by one person does not reduce the air available for others - a free good does not have an opportunity cost
LABOUR
Labour is the human input into the production process.
In the UK, of about 59 million inhabitants only approximately 35 million are of working age (16-64 years for men and 16-59 for women), and of those about 28 million have paid jobs. The employment level for people in the Uk economy is shown in the chart below. Over recent years there has been a sustained increase (expansion) in the employed labour force - providing more labour resources with which to increase total output (GDP)
Two important points need to be remembered about labour as a resource:
A housewife, a keen gardener and a DIY enthusiast all produce goods and services, but they do not get paid for them. They are producing non-marketed output and the output of these people is not included in Gross Domestic Product
Not all labour is of the same quality. Some workers are more productive than others because of the education, training and experience they have received
Human capital refers to the quality of labor resources, which can be improved through investments in education, training, and health
ENTREPRENEURS
Entrepreneurs are people who organize other productive resources to make goods and services. Some economists regard entrepreneurs as a specialist form of labour input. Others believe that they deserve recognition as a separate factor of production in their own right.
The success and/or failure of a business often depends critically on the quality of entrepreneurship.
CAPITAL
To an economist, capital has several meanings - including the finance raised to operate a business. But normally the term capital means investment in goods that can produce other goods in the future.
Capital refers to the machines, roads, factories, schools and office blocks which human beings have produced in order to produce other goods and services. A modern industrialized economy possesses a large amount of capital, and it is continually increasing. Increases to the capital stock of a nation are called investment. Investment is important if the economy is to achieve economic growth in the long run.
FIXED CAPITAL:
Fixed capital includes machinery, plant and equipment, new technology, factories and buildings - all goods designed to increase the productive potential of the economy in future years.
We also include the social capital created from Government investment spending, i.e. the building of new schools, universities, hospitals and spending on expanding the national road network. In the summer of 2000, Chancellor Gordon Brown announced large scale increases in government spending on education, health and transport. One reason behind this spending boost was the desire to increase the stock of social capital available to meet the needs of the economy in a changing world.
See also public goods and merit goods
WORKING CAPITAL:
Working capital includes stocks of finished and semi-finished goods (components) that will be either consumed in the near or will be made into finished consumer goods.
Example: What resources go into making a car?
Focus on the main factor inputs:
Labour: Workers employed directly in the car industry; engineers, designers, paint sprayers, testers, management staff, transport & distribution workers etc
Land: Natural resources used in manufacturer, land for plant and equipment
Capital: Fixed capital: machinery, technology, buildings + Working capital: i.e. stocks of raw materials and components
Entrepreneurship (sometimes seen as a separate factor): management, risk-taker
"If God had meant there to be more than 2 factors of production, He would have made it easier for us to draw three-dimensional diagrams"
Summary on Factors of Production:
All businesses, no matter what type, rely on four factors that allow them to operate smoothly. These four factors are natural resources, capital, human resources, and entrepreneurship. Each one of these factors is extremely important to every business operation. A company must balance these resources and consider their cost in order for them to stay profitable.Natural resources include all items that occur naturally. A few examples of this are land, water, and other things that are not man-made. Even the most basic level, all companies must buy land in order to have a place to do business. Though some companies might not rely directly on natural resources to produce their product, but the products that they buy from other companies are likely to at some point have been derived from natural resources.
Capital another factor in play a huge role in the formation and expansion of the company. Capital includes things like tools, machines, and other things that a business uses in order to produce their goods or services. At some level, all companies rely on their capital in order to successfully run. Without these things, the company would not be able to produce anything. These things can be very expensive, so this can be a hard part for the owner to finance.
Yet another factor of production is human resources. Human resources deals with everybody that works within the company. All companies need labor in order to function. Everyone from the manual workers, to the owner of the company falls under the classification of human resources. Without this factor, there would be no company at all because nobody would be working there.
The final factor production is entrepreneurship. Entrepreneurs are the people that start their own business, taking all the necessary risks in order to, hopefully, make a profit. Without these people and their ideas, no companies would ever start. Starting a business extremely risky, because there is no way to tell if it will be profitable until after you've tried. However, if you manage the company well and people want your goods or services, there's a good chance he will be successful in the end. In order to take this risk, entrepreneur must collect the necessary resources needed to start the company. If he or she does not have natural resources, capital, and human resources, then there is no way to get the company off the ground. Without these factors, company will never amount to anything more than an idea.
All businesses, no matter what type, rely on four factors that allow them to operate smoothly. These four factors are natural resources, capital, human resources, and entrepreneurship. Each one of these factors is extremely important to every business operation. A company must balance these resources and consider their cost in order for them to stay profitable.Natural resources include all items that occur naturally. A few examples of this are land, water, and other things that are not man-made. Even the most basic level, all companies must buy land in order to have a place to do business. Though some companies might not rely directly on natural resources to produce their product, but the products that they buy from other companies are likely to at some point have been derived from natural resources.
Capital another factor in play a huge role in the formation and expansion of the company. Capital includes things like tools, machines, and other things that a business uses in order to produce their goods or services. At some level, all companies rely on their capital in order to successfully run. Without these things, the company would not be able to produce anything. These things can be very expensive, so this can be a hard part for the owner to finance.
Yet another factor of production is human resources. Human resources deals with everybody that works within the company. All companies need labor in order to function. Everyone from the manual workers, to the owner of the company falls under the classification of human resources. Without this factor, there would be no company at all because nobody would be working there.
The final factor production is entrepreneurship. Entrepreneurs are the people that start their own business, taking all the necessary risks in order to, hopefully, make a profit. Without these people and their ideas, no companies would ever start. Starting a business extremely risky, because there is no way to tell if it will be profitable until after you've tried. However, if you manage the company well and people want your goods or services, there's a good chance he will be successful in the end. In order to take this risk, entrepreneur must collect the necessary resources needed to start the company. If he or she does not have natural resources, capital, and human resources, then there is no way to get the company off the ground. Without these factors, company will never amount to anything more than an idea.
factors_of_production.ppt | |
File Size: | 2091 kb |
File Type: | ppt |
factors_of_production_1.ppt | |
File Size: | 325 kb |
File Type: | ppt |
Introduction to Economics
This Activity is designed to be used in the classroom or as a homework task to support the teaching and learning of Introduction to Economics.
What is Economics About? - Activity
This is a question that is more often asked at induction evenings for prospective AS/A2 students than any other. This Activity is designed to help you to understand at least something about what you will be studying over the coming months and to be able to identify some of the key economic issues and problems that make up the subject.
What is Economics About? - Activity
This is a question that is more often asked at induction evenings for prospective AS/A2 students than any other. This Activity is designed to help you to understand at least something about what you will be studying over the coming months and to be able to identify some of the key economic issues and problems that make up the subject.
What happens when oil eventually runs out?
Why can't we just pay doctors and nurses more money?
Why can't I just get a grant to go to university?
The unemployed should get off their backsides and get a job!
Why do people always get so excited about interest rate changes?
Inflation - no idea what it is; it doesn't affect me!
It's obvious that fining polluters would stop them from doing it!
We should just wipe out the debt that third world countries owe us.
I never seem to have enough to get what I want, I wish I could win the lottery - not millions just enough to get by!
That CD I bought was a real bargain at £10 - I would have paid anything up to £30 to get it, it is sooo cool!
It's crazy, fishermen are catching decent fish and have to throw half of them overboard - even though they are dead!
It's not fair, they are the only firm I can buy from and they are so expensive; I don't have any choice!
It's so annoying, the price of my train journey is twice as expensive before 9 o'clock!
Not another threatened strike, why don't they just go back to work?
The above questions and comments are all issues that you might be faced with during the course - many of them will be familiar and there are bound to be many, many more.
Task 1
Why can't we just pay doctors and nurses more money?
Why can't I just get a grant to go to university?
The unemployed should get off their backsides and get a job!
Why do people always get so excited about interest rate changes?
Inflation - no idea what it is; it doesn't affect me!
It's obvious that fining polluters would stop them from doing it!
We should just wipe out the debt that third world countries owe us.
I never seem to have enough to get what I want, I wish I could win the lottery - not millions just enough to get by!
That CD I bought was a real bargain at £10 - I would have paid anything up to £30 to get it, it is sooo cool!
It's crazy, fishermen are catching decent fish and have to throw half of them overboard - even though they are dead!
It's not fair, they are the only firm I can buy from and they are so expensive; I don't have any choice!
It's so annoying, the price of my train journey is twice as expensive before 9 o'clock!
Not another threatened strike, why don't they just go back to work?
The above questions and comments are all issues that you might be faced with during the course - many of them will be familiar and there are bound to be many, many more.
Task 1
- Write down five questions or statements that you think have something to do with economics.
- Now share your ideas with the rest of the class. Given the range of comments and issues collected by the group could you now write down a definition of what economics is?
More on Economics Introduction
Economics is essentially a subject that looks at choices - how individuals, governments and businesses make them and what the consequences of making those decisions are. There is a strong likelihood that every issue raised in the class involves some form of decision or choice - for example, if fines were the answer to pollution - the choice being to pollute and get fined or not pollute and avoid the fine - the question may then be how much of a fine is necessary before those who choose to pollute feel the cost of doing so is too great?
The economy therefore is faced with three key questions that have to be answered - irrelevant of the complexity of the economic system involved.
The economy therefore is faced with three key questions that have to be answered - irrelevant of the complexity of the economic system involved.
- What goods and services should be produced? Should the economy focus on being self-sufficient or concentrate on what it is good at? Should it devote resources to health and education or defence and policing? Should we devote more resources to housing? Should an economy use resources producing goods that are essentially useless - like 'free' toys in cereal packets, football sticker cards and so on?
- How should goods and services be produced? Should the economy use a system that is labour intensive, thereby ensuring everyone who wants a job has one, or should we use more efficient methods of production that involve the use of machines, even if this means more pollution and fewer jobs? Should we devote more land to production and thus solve some problems of feeding the population at the expense of encroaching into areas of natural beauty?
- Who should get the resources that the economy has produced? Should an economy be geared to providing goods and services to every person as equally as possible or should those who work hard get more? How do we distribute our resources?
Answers to Page 11 Question No. 1 (Sample) Complete Questions 2,3,4 for Homework
(a) The resources of the island need to support more than just the native population because, although it is a small island nation, the country is popular tourist destination and so the resources are needed to support a much larger population, especially at certain times of the year when the greatest number of tourist come to the island.
(b) Two examples of Scare resources are Land and Labour. We are told that several big hotel chains have build leisure resorts; there is only so much land available, especially given that the land required needs to be in the coastal areas as near as possible to the beaches. Labour is also a scarce resource; there is not enough labour with the required skills and experience to work in the fish canning industry and the leisure industry.
(c) Two examples of natural resources that are being used by the people of Country A are the beaches and the fish. The beaches are used as part of the tourism industry, with hotels located near to them, while the fish are caught and then canned in a large factory in the west of the island.
(d) The concept of opportunity cost involves a sacrifice that has to be made as a result of a decision taken. In this case, the decision that has been taken is to increase tourism. The sacrifice involves the alternative uses that the resources or factors of production could have had. For example, land will be taken to build more hotels; this land could have been left as an area of natural beauty near to the sea. Similarly, more workers will be required to be employed in the tourist industry and these might have worked in alternative jobs such as the fish canning industy.
2 (a) The four factors of production used in the fishing industry are land or natural resources (the fish in the sea), labour (the people who work in the fishing industry, such as fishermen and workers who do the canning), capital (the fishing boats and the factory) and enterprise (the people who take the risk in organising the fishing and canning).
(b) The reward to land will be the rent that is paid. The reward to labour will be the wages or salaries received by the workers. The reward to enterprise will be the profit that is obtained.
(c) The four factors of production used in the hotel industry are land or natural resources (the land where the hotels are built), labour (the people who work in various capacities in the hotels), capital (the hotels themselves and all the facilities and equipment contained within them) and enterprise (the people who take the risk in organising the hotels in the expectation of profit).
(d) This is again an example of opportunity cost. If it is proposed to increase the tourist industry, there will be a reallocation of resources away from other industries towards the tourist industry. In this case, fewer workers will be employed in the fishing industry, both as fishermen and as workers in the canning factory.
3 (a) The opportunity cost of using more buildings in the town for offices and shops is the next best alternative use that these buildings could have been used for. For example, they could have been used as private dwellings; this would have meant that fewer residents would have had to move out to the suburbs. It would also have meant that the area would have been quieter, less congested and less polluted.
(b) One opportunity cost to local residents who chose to move out of the town was the fact that they could have lived in the town, much nearer to where they worked; this would have saved them time. Another opportunity cost is the items that could otherwise have been bought with the money that is now needed to pay for the transport into town by bus or car.
(c) One opportunity cost to the owners of the land that will now be used to build apartments on will be the use of the land that is now being given up; for example, it could have been used as farming land. Another opportunity cost is the income that has now been given up, such as the income from using the land as farming land.
(d) A government could use various policies to reduce congestion and pollution in the town. For example, it could deny planning permission for the buildings to be used as shops or offices. It could also restrict vehicles from entering particular areas of the town. The government could also charge very high taxes on the firms using the buildings as offices and shops.
4 (a) The term ‘our resources’ refers to the factors of production that are available to be used on the island for economic activity, i.e. land, labour, capital and enterprise.
(b) The government tourism minister, in referring to the need to ‘make best use of our resources’, means that the factors of production will gain greater rewards. More tourists will be attracted to the island, spending money locally; this will lead to greater rewards in the form of rent, wages and salaries, interest and profit to the four factors of production.
(c) One possible opportunity cost would be the tourists who would now not come to the island, and the money that they would otherwise have spent on the island, believing that it was now too developed. Another possible opportunity cost would be the jobs that would otherwise have been provided if other companies had been attracted to locate in the island; these might have been able to employ more people than the international holiday companies.
(d) Increased tourism would certainly mean that more people would come to the island and these people would spend money locally. It would also mean that jobs would be needed to satisfy the tourists. Resources, however, are scarce and so if more resources are allocated to the tourist industry, it means that fewer resources are allocated to other economic uses, for example fishing and fish canning. There is a problem with the tourist industry that if there is a prolonged recession, demand might fall and this could severely damage the island’s economy. The opportunity cost of using resources today is the use that could have been made of them in the future. For example, it is possible that the greater use of beaches might have a damaging effect on them. It is, therefore, very difficult to determine whether increased tourism would involve the best use of the island’s resources in the long term. There, perhaps, needs to be more of a balance between the conservation and the use of scarce resources.
(a) The resources of the island need to support more than just the native population because, although it is a small island nation, the country is popular tourist destination and so the resources are needed to support a much larger population, especially at certain times of the year when the greatest number of tourist come to the island.
(b) Two examples of Scare resources are Land and Labour. We are told that several big hotel chains have build leisure resorts; there is only so much land available, especially given that the land required needs to be in the coastal areas as near as possible to the beaches. Labour is also a scarce resource; there is not enough labour with the required skills and experience to work in the fish canning industry and the leisure industry.
(c) Two examples of natural resources that are being used by the people of Country A are the beaches and the fish. The beaches are used as part of the tourism industry, with hotels located near to them, while the fish are caught and then canned in a large factory in the west of the island.
(d) The concept of opportunity cost involves a sacrifice that has to be made as a result of a decision taken. In this case, the decision that has been taken is to increase tourism. The sacrifice involves the alternative uses that the resources or factors of production could have had. For example, land will be taken to build more hotels; this land could have been left as an area of natural beauty near to the sea. Similarly, more workers will be required to be employed in the tourist industry and these might have worked in alternative jobs such as the fish canning industy.
2 (a) The four factors of production used in the fishing industry are land or natural resources (the fish in the sea), labour (the people who work in the fishing industry, such as fishermen and workers who do the canning), capital (the fishing boats and the factory) and enterprise (the people who take the risk in organising the fishing and canning).
(b) The reward to land will be the rent that is paid. The reward to labour will be the wages or salaries received by the workers. The reward to enterprise will be the profit that is obtained.
(c) The four factors of production used in the hotel industry are land or natural resources (the land where the hotels are built), labour (the people who work in various capacities in the hotels), capital (the hotels themselves and all the facilities and equipment contained within them) and enterprise (the people who take the risk in organising the hotels in the expectation of profit).
(d) This is again an example of opportunity cost. If it is proposed to increase the tourist industry, there will be a reallocation of resources away from other industries towards the tourist industry. In this case, fewer workers will be employed in the fishing industry, both as fishermen and as workers in the canning factory.
3 (a) The opportunity cost of using more buildings in the town for offices and shops is the next best alternative use that these buildings could have been used for. For example, they could have been used as private dwellings; this would have meant that fewer residents would have had to move out to the suburbs. It would also have meant that the area would have been quieter, less congested and less polluted.
(b) One opportunity cost to local residents who chose to move out of the town was the fact that they could have lived in the town, much nearer to where they worked; this would have saved them time. Another opportunity cost is the items that could otherwise have been bought with the money that is now needed to pay for the transport into town by bus or car.
(c) One opportunity cost to the owners of the land that will now be used to build apartments on will be the use of the land that is now being given up; for example, it could have been used as farming land. Another opportunity cost is the income that has now been given up, such as the income from using the land as farming land.
(d) A government could use various policies to reduce congestion and pollution in the town. For example, it could deny planning permission for the buildings to be used as shops or offices. It could also restrict vehicles from entering particular areas of the town. The government could also charge very high taxes on the firms using the buildings as offices and shops.
4 (a) The term ‘our resources’ refers to the factors of production that are available to be used on the island for economic activity, i.e. land, labour, capital and enterprise.
(b) The government tourism minister, in referring to the need to ‘make best use of our resources’, means that the factors of production will gain greater rewards. More tourists will be attracted to the island, spending money locally; this will lead to greater rewards in the form of rent, wages and salaries, interest and profit to the four factors of production.
(c) One possible opportunity cost would be the tourists who would now not come to the island, and the money that they would otherwise have spent on the island, believing that it was now too developed. Another possible opportunity cost would be the jobs that would otherwise have been provided if other companies had been attracted to locate in the island; these might have been able to employ more people than the international holiday companies.
(d) Increased tourism would certainly mean that more people would come to the island and these people would spend money locally. It would also mean that jobs would be needed to satisfy the tourists. Resources, however, are scarce and so if more resources are allocated to the tourist industry, it means that fewer resources are allocated to other economic uses, for example fishing and fish canning. There is a problem with the tourist industry that if there is a prolonged recession, demand might fall and this could severely damage the island’s economy. The opportunity cost of using resources today is the use that could have been made of them in the future. For example, it is possible that the greater use of beaches might have a damaging effect on them. It is, therefore, very difficult to determine whether increased tourism would involve the best use of the island’s resources in the long term. There, perhaps, needs to be more of a balance between the conservation and the use of scarce resources.
Task 2
- Make a list of answers to these questions - think of the answers in general terms rather than specifics, e.g. food, health, etc.
- What should be produced?
- How should these goods and services be produced?
- Who should get what is produced?
- Having identified these key questions, now take them a stage further - take one item from the list you have in question 1 and break it down further - for example, in health, should the resources allocated to this area be spent on fertility treatment, heart disease, cancer treatment or research into AIDs, etc?
- Having considered these factors now start to think about which of these resources you feel should actually be provided and to whom!
You are now in a position where you have had to make decisions. In doing so there will inevitably be some sacrifice to be made. The sacrifice is, for example, in deciding that cancer treatment is more important than fertility treatment. You are making judgements; these judgements cannot always be quantified to any great degree.
Economists call these sacrifices Opportunity Cost. Opportunity Cost is central to any understanding of economics; if you understand and can apply this concept you are on the way to thinking like an economist - this will be very important as you go through the course!
Economists illustrate the concept through the use of Production Possibility Frontiers (PPFs) or Production Possibility Curves (PPCs). Look at the diagram below.
Economists call these sacrifices Opportunity Cost. Opportunity Cost is central to any understanding of economics; if you understand and can apply this concept you are on the way to thinking like an economist - this will be very important as you go through the course!
Economists illustrate the concept through the use of Production Possibility Frontiers (PPFs) or Production Possibility Curves (PPCs). Look at the diagram below.
The Economic Problem
- Key Questions
- What Goods and Service Should be Produced?
- Capital Goods
- Consumer Goods
- Public Goods
- Merit Goods
- How should these Goods and Services be Produced?
- Land Intensive
- Labour Intensive
- Capital Intensive
- Efficiency
- Who should get what is produced?
- Income Distribution
- Wealth Distribution
- What Goods and Service Should be Produced?
- Normative Statements
- Statements of opinion - cannot be proved or disproved
- Positive Statements
- Can be supported or refuted by reference to evidence/facts
- Decision Making and Choices
- Opportunity Cost
- Production Possibility Frontiers
- The Economy
- Production
- Exchange
- The Economic Problem
- Unlimited Wants
- Scarce Resources
- Land
- Labour
- Capital
introduction_to_economics.ppt | |
File Size: | 4532 kb |
File Type: | ppt |
introduction_to_economics_part_2.ppt | |
File Size: | 3497 kb |
File Type: | ppt |
Production Possibility Curves (PPCs)
The diagram shows the possibilities for a hospital in the provision of two treatments - one for cancer treatment and one for fertility treatment. The maximum amount of respective treatment that can be given with existing resources is shown by the points where the PPF intersects with the horizontal and vertical axes. If all resources were devoted to fertility treatment then Fo patients could be treated but the consequences of this would be that there would be no funds available for cancer patients. Conversely, if all resources were devoted to cancer treatment, Co patients would get treated but, as in the first case, there would now be no funds available for patients seeking fertility treatment.
Task 3
Analyse the impact of the decision making process on patient care in these two areas of different resource allocations, for example:
Analyse the impact of the decision making process on patient care in these two areas of different resource allocations, for example:
- Think about the implications of being on different points on the PPF
- What are the implications of being at some point within the PPF
- What would be the implications of moving from one point to another, either within or on the PPF?
- How would hospital managers be able to extend the PPF outwards?
- What might be the cause of an inward shift of the PPF?
Applying your knowledge and Understanding
The Health ServiceImage: Should NHS money be spent on funding more operations, or should it go on training and employing more GPs?
A recurring theme of manifesto commitments made by the Labour Government in both 2001 and 2005 was the improvement of the health service. The problems facing the National Health Service (NHS) have been huge: under-investment, poor pay, inability to recruit and retain the right staff, endless competing demands on resources, the developments in technology and treatment and numerous crises have all contributed to the problem. Solving it is not going to be quick or easy but does highlight the central issue in economics - that of resource allocation and choice.
The Chancellor has raised taxes (primarily through raising National Insurance) to pay for massive investment in the NHS. The NHS budget for 2005-6 is £76.38 billion, which accounts for 18% of total government spending, and 6.95% of total GDP. Despite these massive funds, problems still exist: waiting times for operations are stubbornly refusing to fall to the level the government would like; recruitment of new staff - especially doctors and specialist nursing staff - takes time and is not necessarily going to hit targets set; arguments continue over where NHS funds would be most appropriately spent - on preventative medicine, on more primary healthcare (GPs) on major health problems such as cancer and heart trouble - or on more mundane, but nevertheless debilitating conditions, such as hip replacement operations.
The government therefore has to convince voters that this extra spending willeventually lead to an improvement in the service. Many in the UK would be willing to pay higher taxes if it could be proved that the extra spending would lead to a better service. However, the evidence is not so clear-cut. Suggestions therefore have been made about alternative methods of funding the NHS.
One such system is a social insurance fund. With this system, employers and employees would have to pay a contribution from their salary into one of a number of competing schemes. Such schemes would be dedicated to providing the best possible use of funds for health care. The problem with such schemes is that it would increase business costs - possibly reducing employment!
Another system could involve greater use of private health policies. Responsibility for this would be in the hands of the individual to ensure they had enough insurance cover to pay for any medical bills and treatment. This type of system is more common in the USA but there are many who criticise such a system. It invariably means some people who need the treatment cannot afford to pay health insurance; others may gamble about not needing it only to find themselves landed with huge debts if they do need treatment!
The problem in the UK, however, is quite different to that in a country such as Tanzania in Africa. Tanzania is a poor country: it has a population of 35 million and has a national income of around £5.5 billion per year! The poor healthcare facilities have a significant impact on its ability to create wealth to improve its situation. Lack of preventative medicine means more people get sick from diseases such as malaria, typhoid and so on. This means they are unable to work, which means they do not earn enough money and so the government has a lack of funds through taxes to invest in the health service, which means... you get the picture! In Tanzania, significant effects can be observed through very simple treatments - rehydration salts, anti-malaria netting and so on - which could, if the government of Tanzania had the funds, make a huge difference to the lives of the people and to the general health and wealth creation capacities of the population.
A recurring theme of manifesto commitments made by the Labour Government in both 2001 and 2005 was the improvement of the health service. The problems facing the National Health Service (NHS) have been huge: under-investment, poor pay, inability to recruit and retain the right staff, endless competing demands on resources, the developments in technology and treatment and numerous crises have all contributed to the problem. Solving it is not going to be quick or easy but does highlight the central issue in economics - that of resource allocation and choice.
The Chancellor has raised taxes (primarily through raising National Insurance) to pay for massive investment in the NHS. The NHS budget for 2005-6 is £76.38 billion, which accounts for 18% of total government spending, and 6.95% of total GDP. Despite these massive funds, problems still exist: waiting times for operations are stubbornly refusing to fall to the level the government would like; recruitment of new staff - especially doctors and specialist nursing staff - takes time and is not necessarily going to hit targets set; arguments continue over where NHS funds would be most appropriately spent - on preventative medicine, on more primary healthcare (GPs) on major health problems such as cancer and heart trouble - or on more mundane, but nevertheless debilitating conditions, such as hip replacement operations.
The government therefore has to convince voters that this extra spending willeventually lead to an improvement in the service. Many in the UK would be willing to pay higher taxes if it could be proved that the extra spending would lead to a better service. However, the evidence is not so clear-cut. Suggestions therefore have been made about alternative methods of funding the NHS.
One such system is a social insurance fund. With this system, employers and employees would have to pay a contribution from their salary into one of a number of competing schemes. Such schemes would be dedicated to providing the best possible use of funds for health care. The problem with such schemes is that it would increase business costs - possibly reducing employment!
Another system could involve greater use of private health policies. Responsibility for this would be in the hands of the individual to ensure they had enough insurance cover to pay for any medical bills and treatment. This type of system is more common in the USA but there are many who criticise such a system. It invariably means some people who need the treatment cannot afford to pay health insurance; others may gamble about not needing it only to find themselves landed with huge debts if they do need treatment!
The problem in the UK, however, is quite different to that in a country such as Tanzania in Africa. Tanzania is a poor country: it has a population of 35 million and has a national income of around £5.5 billion per year! The poor healthcare facilities have a significant impact on its ability to create wealth to improve its situation. Lack of preventative medicine means more people get sick from diseases such as malaria, typhoid and so on. This means they are unable to work, which means they do not earn enough money and so the government has a lack of funds through taxes to invest in the health service, which means... you get the picture! In Tanzania, significant effects can be observed through very simple treatments - rehydration salts, anti-malaria netting and so on - which could, if the government of Tanzania had the funds, make a huge difference to the lives of the people and to the general health and wealth creation capacities of the population.
The text above is typical of the sort of article available in newspapers and magazines such as 'The Economist', 'Newsweek' and so on. You will gain a great deal from reading all manner of relevant articles in your studies - but the secret is to read it like an economist!!
Task 4
When reading the text, try to identify the following and where they occur:
When reading the text, try to identify the following and where they occur:
- How does the text relate to the three key questions that are at the heart of the 'economic problem'?
- What are the opportunity costs involved in deciding on appropriate levels of health care?
- What parts of the text are positive statements and which are normative? Explain your answer.
- How does the text suggest that there may be alternative answers to the issue of the provision of health in the UK?
unit-2.docx | |
File Size: | 199 kb |
File Type: | docx |
unit-3.docx | |
File Size: | 218 kb |
File Type: | docx |
unit-4.docx | |
File Size: | 108 kb |
File Type: | docx |
unit-5.docx | |
File Size: | 503 kb |
File Type: | docx |